What do employers need to consider regarding retirement savings and 401(k) plans? One of the most popular and widely offered retirement plan options is the cash or deferred arrangement (CODA), commonly known as a 401(k) plan, after the section of the Internal Revenue Code (IRC) that authorizes them. A CODA is a special type of defined contribution plan under which an eligible employee can elect to have the employer defer part of his or her salary and contribute the deferred amount to the plan or receive the full amount of the salary as cash. If an employee chooses to defer compensation, it is not subject to income taxation until it is withdrawn from the plan.

The advent of the 401(k) plan began a major shift in the way Americans plan and save for retirement. The days of relying on traditional employer-provided pension plans as the primary source of retirement income are fast becoming extinct. In their place are 401(k) plans in which employees can save for retirement on a pretax basis, and employers can better control their retirement costs because there are no minimum funding levels or guaranteed retirement benefits.

Other employer-sponsored retirement plans that are similar to but simpler to administer than 401(k) plans include simplified employee pensions (SEPs) and SIMPLE plans. These plans have specified minimum requirements and offer less design flexibility in return for simple administration. Additionally, educational institutions and nonprofit organizations may provide 403(b) plans for their employees. Government employers may sponsor 457 plans. These plans have many of the same features and restrictions as 401(k) plans.

Despite the growing predominance of 401(k) and other defined contribution retirement plans, some employers still have defined benefit pension plans. In 2006, the Pension Protection Act (PPA) imposed new funding and disclosure requirements for these plans. PPA’s funding provisions, including minimum contributions and potential excise tax sanctions, were implemented by the Internal Revenue Service (IRS) in 2015 final rules.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted as part of the general appropriations bill for 2020, made many changes to the retirement plan requirements. These include:

The 2023 appropriations package included a second round of changes, known as SECURE 2.0. These include:

In 2020, the U.S. Department of Labor (DOL) created a new safe harbor for electronic disclosures regarding retirement plans. Plan administrators that satisfy certain conditions may notify retirement plan participants that SPDs and other required disclosures will be posted on a website. At the same time, participants can choose to opt out of electronic delivery or request paper copies of disclosures.

The final rule, published on May 27, 2020 (85 Fed. Reg. 31884), allows retirement plan administrators to furnish certain required disclosures using a “notice-and-access” model, or to e-mail disclosures directly to participants.

Plan administrators must notify plan participants about these online disclosures, provide information on how to access the disclosures, and inform participants of their rights to request paper or opt out completely. The rule also includes additional protections such as accessibility and readability standards for online disclosures and system checks for invalid electronic addresses.

Because 401(k) plans are tax-qualified defined contribution plans that include a CODA, they must satisfy all of the requirements for qualified plans, the special requirements of IRC Sec. 401(k), and all the Employee Retirement Income Security Act (ERISA) requirements that apply to defined contribution plans, including minimum participation and vesting standards, fiduciary rules, and reporting and disclosure requirements. Many special rules apply to 401(k) plans, including special vesting and nondiscrimination testing requirements. In addition, the rules on plan loans and blackout periods, while they impact other types of retirement plans, most often affect the design and administration of 401(k) plans. Please see the national ERISA, national Benefits Recordkeeping and Disclosures sections.

While many 401(k) plans only include a CODA, they often also provide for employer-matching contributions and discretionary employer contributions. Many CODAs are part of a larger defined contribution plan that may include a profit-sharing component. For some employers, a 401(k) plan is part of a retirement package that may include a defined benefit plan or a hybrid plan.

Matching contributions. Perhaps the most crucial design consideration for a 401(k) plan sponsor is whether and how to provide matching contributions. Matching contributions are the best way to encourage employees to participate in a 401(k) plan. A 100 percent match is a large incentive to participation but is also expensive. Common match formulas are 50 percent of employee contributions up to the first 6 percent of compensation and no match on the portion of the contribution that exceeds 6 percent of compensation.

Contributions of unused paid time off. The IRS has ruled that a 401(k) plan may permit contributions of payments employees would receive for unused vacation or other similar leave at the end of the year or at termination of employment, whether the contributions are employer contributions or elective 401(k) contributions (Rev. Rul. 2009-31 and Rev. Rul. 2009-32). The 401(k) nondiscrimination tests must still be passed, and the contributions may not exceed any applicable limits, including the limit on total contributions to an individual's account during a year. In addition, a plan participant does not include in gross income the dollar equivalent of unused paid time off that is not contributed to the 401(k) plan until the year in which the amount is paid to the participant.

The IRS provides for dollar limitations on benefits and contributions under qualified retirement plans, including 401(k) plans. These limits are adjusted annually for cost-of-living increases. For current limits on an employee’s elective deferrals to a 401(k) plan, visit http://www.irs.gov. A plan may provide for the employer to match all, part, or none of an employee's deferrals.

Employer contributions to defined benefit plans, including matching contributions to 401(k) plans, must vest either 100 percent after 3 years of service or 20 percent per year of service beginning after the second year and reaching 100 percent after 6 years.

SEP and SIMPLE individual retirement account (IRA) (and other IRA-based) plans require that all contributions to the plan are always 100 percent vested.

Because ERISA's fiduciary rules bar employers from using plan assets for their own benefit, the DOL has issued regulations that define when employees' contributions to a benefit plan become plan assets, must no longer be in the employer's possession, and must be deposited into a plan account. This is the number one fiduciary trouble spot. Late deposits are an invitation for an audit by the DOL.

In general, amounts that a participant had withheld from his or her wages by an employer for contribution to an ERISA plan are deemed to be plan assets on the earliest date on which such contributions can reasonably be segregated from the employer's general assets. However, in no case may pension benefit plan and welfare benefit plan deposits of employee contributions be made later than the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash. This rule also applies to SIMPLE IRAs and salary reduction SEPs.

Warning: The DOL's rule of thumb is that small plans sponsored by an employer with a simple payroll process should be able to make deposits of employee contributions within 7 days. Large plans, which may have multiple locations and multiple paydays, should be able to make deposits within 10 to 14 days, in the DOL's view. The deposit timing rules apply to withholding for plan loan repayments as well as employee contributions.

Small employer safe harbor. The DOL regulations create a safe harbor for plans with fewer than 100 participants if deposits of employee contributions are made within 7 business days of receipt or withholding. Thus, if such plans make their deposits within 7 business days, the deposit is deemed to be on time without having to determine when they reasonably could be segregated. To qualify for the safe harbor, loan repayments must also be deposited within 7 business days. Participant contributions are considered deposited when placed in an account of the plan, without regard to whether the contributed amounts have been allocated to specific participants or investments. The safe harbor also applies to SIMPLE IRAs and salary reduction SEPs.

Generally, distributions from a 401(k) plan cannot be made until a distributable event occurs. A “distributable event” is an event that allows distribution of a participant’s plan benefit and includes the following situations:

Tax on early distributions. If a distribution is made to an employee before he or she reaches the age of 59¹/₂, the employee may have to pay a 10 percent additional tax on the distribution. This tax applies to the amount received that the employee must include in income. The 10 percent tax does not apply to distributions before the age of 59¹/₂ if the distribution is:

Distribution starting requirements. Benefit payment must begin when required. Unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods:

Minimum distribution requirements. A 401(k) plan must provide that each participant will either:

These required distribution rules apply individually to each qualified plan. The required distribution from a 401(k) plan cannot be satisfied by making a distribution from another plan. The plan document must provide that these rules override any inconsistent distribution options previously offered. When the participant’s account balance is to be distributed, the plan administrator must determine the minimum amount required to be distributed to the participant each calendar year.

The required beginning date for distributions is April 1 of the first year after the later of:

The SECURE Act raised this age to 72 from 70¹/₂, effective for individuals who turned 70¹/₂ on or after January 1, 2020.

A plan may require that the participant begin receiving distributions by April 1 of the year after the participant reaches the age of 72, even if the participant has not retired.

If the participant is a 5 percent owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reaches the age of 72.

SECURE 2.0 raises the RMD age further, to 73 for individuals who turn 72 on or after January 1, 2023.

Distributions after the starting year. The distribution required to be made by April 1 is treated as a distribution for the starting year. (The starting year is the year in which the participant reaches the age of 72 or retires, whichever applies, to determine the participant’s required beginning date.) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31).

The IRS regulations set out the requirements for hardship distributions from a 401(k) plan. The plan must specifically permit such a distribution. In addition, a distribution qualifies as a hardship distribution only if it is both (1) made because of an immediate and heavy financial need of the employee and (2) is necessary to satisfy the financial need. The determination of the existence of an immediate and heavy financial need and of the amount necessary to meet the need must be made in accordance with nondiscriminatory and objective standards set forth in the plan and must be made separately.

Determination of an immediate and heavy financial need. Whether an employee has an immediate and heavy financial need is to be determined based on all the relevant facts and circumstances. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee. Under the regulations as revised on September 23, 2019 (84 Fed. Reg. 49651), a distribution is deemed to be due to an immediate and heavy financial need of the employee if the distribution is for:

A “primary beneficiary under the plan” is an individual who is named as a beneficiary under the plan and has an unconditional right to all or a portion of the participant’s account balance under the plan upon the death of the participant.

For circumstances that do not fall under one of the six safe harbors listed above, these three criteria must be met:

An employer may impose additional conditions, which may include requiring the employee to first obtain all nontaxable loans from the plan, but may not include suspending elective contributions.

403(b) and 457 plans. The hardship distribution rules also apply to 403(b) and 457 plans.

Birth or adoption. A plan may allow a distribution of up to $5,000 within 1 year after a child is born to, or adopted by, the plan participant. IRS Notice 2020-68 provides guidance on these qualified birth or adoption distributions (QBADs).

There is an exemption from the 10 percent early withdrawal penalty for individuals ordered or called to active duty. A "qualified reservist distribution" is a distribution that is:

A 401(k) plan does not violate the distribution restrictions if it makes a qualified reservist distribution.

An individual who receives a qualified reservist distribution may, during the 2 years following the end of his or her active duty, make one or more contributions to an IRA of the amount of such distribution.

One of the most popular features of 401(k) plans is a provision allowing participants to borrow money from their own accounts. Under the DOL regulations, the loan must be available to all participants and beneficiaries on a reasonably equivalent basis, must not be available to highly paid employees in an amount greater than available to other employees, must be specifically provided for in the plan document, must bear a reasonable interest rate, and must be adequately secured. The loan may be secured by the participant's account balance. A loan secured by 50 percent of the account balance is considered adequately secured. A loan is not treated as a distribution by the IRS (resulting in income tax consequences) if it meets at least the following specific requirements:

Note: The Sarbanes-Oxley Act Sec. 402 prohibits publicly held companies from making personal loans to their directors and executive officers. This arguably includes 401(k) loans. In view of the steep penalties that may be imposed for violating Sarbanes-Oxley, a very conservative approach would be to advise executive officers not to make new 401(k) loans or amend 401(k) plans to bar loans to executive officers. The DOL indicated in Field Assistance Bulletin 2003-1 that restrictions on loans to all officers and directors do not violate participant loan rules under ERISA.

Employers may not force an employee whose accrued vested benefit is worth more than $5,000 to take a distribution of benefits when the employee terminates employment. The employer must allow the employee to keep the money in the plan until retirement age. Plans may require that terminating employees with accrued vested benefits of less than $5,000 take a cash-out, thus reducing the administrative cost of maintaining small accounts and keeping track of former employees.

Employer-mandated cash-outs of more than $1,000 from a qualified retirement plan must be paid as a direct rollover to an IRA setup by the employer for the employee unless the terminating employee elects to have the amount rolled over to another retirement plan or IRA or to receive the distribution directly. In circumstances in which a portion of the distribution is attributable to a previous rollover contribution, the rollover requirement may apply to distributions of more than $5,000. The portion of the account attributable to the previous rollover is not counted for the determination of whether the present value of the accrued vested benefit is $5,000 or less. On the other hand, the amount attributable to the previous rollover is counted when determining if the cash-out exceeds $1,000.

Plans that provide for mandatory distributions have to include a provision reflecting the automatic rollover requirements.

The plan administrator must notify the distributee in writing that the distribution may be paid in a direct rollover to an IRA. The notice may be mailed to the participant's most recent mailing address in the records of the employer or plan administrator. This notice may also be distributed electronically.

The automatic rollover provisions apply to governmental plans, including deferred compensation plans under IRC Sec. 457, to 403(b) plans, and to church plans.

The DOL regulations provide for a safe harbor to protect retirement plan fiduciaries from liability when they select an institution to provide the IRAs and select the investments for these accounts. For the safe harbor to apply, the selected IRA provider must be qualified to offer individual retirement plans; the investment options must be designed to preserve principal; and the fees and expenses may not exceed those charged by the selected provider to its other IRA customers.

Avoiding the rollover requirement. Many employers are avoiding the complications of required rollovers by not cashing out accounts with a balance of more than $1,000.

The DOL expects plan sponsors to take certain steps to locate missing participants, and in January 2021 issued detailed guidance on doing so. The agency cited the following “red flags” of a potential problem with missing or nonresponsive participants:

A common characteristic of plans with low numbers of missing and nonresponsive participants, the DOL stated, is a commitment to keeping plan records complete and up to date and to taking proactive steps to ensure that participants and beneficiaries get the benefits they have earned in a timely fashion. Such plans use best practices as part of an ongoing culture of fiduciary compliance rather than on one-time or sporadic fixes. According to the DOL, such best practices include:

The SECURE Act requires plan sponsors to quantify the payments a defined contribution (401(k) or 403(b)) plan would yield if structured as a lifetime annuity. The law also creates a fiduciary safe harbor for plan sponsors that actually offer such an annuity. An interim final rule issued September 18, 2020 (85 Fed. Reg. 59132), fleshes out the underlying assumptions plans should use, addresses plans that actually offer in-plan annuities, and provides model notice language.

Special nondiscrimination rules apply to 401(k) plans in addition to all the regular requirements for tax-favored retirement plans. These rules are designed to prevent discrimination in elective contributions, matching contributions, and employee after-tax contributions. These rules, the actual deferral percentage (ADP) test and the actual contribution percentage (ACP) test, are also very complex and discourage many employers from adopting a 401(k) plan. Under the ADP test, the ADP for eligible highly compensated employees (HCEs) must either:

The ACP applies similar formulas to the sum of employee contributions and employer-matching contributions. If a plan is going to fail the ACP or ADP tests, corrections must be made that often involve reducing the deferrals of HCEs.

The IRS's final 401(k) regulations include a provision designed to prevent plans from circumventing the nondiscrimination rules. Under this antiabuse provision, a plan will not be treated as satisfying the nondiscrimination requirements if there are repeated changes to plan testing procedures or plan provisions that have the effect of distorting the ADP so as to increase significantly the permitted ADP for HCEs. In addition, plans are barred from otherwise manipulating the nondiscrimination rules if a principal purpose of the changes was to increase or distort the ADP for HCEs.

ADP/ACP safe harbors. 401(k) plans will generally be eligible for a safe harbor that may automatically satisfy the nondiscrimination requirements if they are designed to meet either of the following criteria:

401(k) plans, however, are required to specify the method they will use to satisfy the nondiscrimination requirements in their plan documents. Thus, a safe harbor plan may not specify that ADP testing will be used if the safe harbor requirements are not satisfied.

In addition, 401(k) safe harbor plans must provide each eligible employee with a written notice of the employee’s rights and obligations under the plan. This notice may be provided electronically. The notice must be sufficiently accurate and comprehensive to inform employees of the their rights and obligations under the plan, be written in a manner calculated to be understood by the average employee eligible to participate in the plan, and contain the following information:

A plan may satisfy the requirements to provide information about other contributions or matching contributions to another plan, the plan to which safe harbor contributions will be made, or the type and amount of compensation that may be deferred under the plan by providing cross-references to the relevant portions of a summary plan description that provides the same information and has been provided (or is concurrently provided) to employees.

The notice must be provided within a reasonable period before the beginning of the plan year (or within a reasonable period before an employee becomes eligible). This requirement is deemed satisfied if the notice is provided at least 30 days and no more than 90 days before the beginning of each plan year. For newly eligible employees, who become eligible after the 90th day before the beginning of the plan year, the notice must be provided no more than 90 days before the employee becomes eligible and no later than the date the employee becomes eligible.

Beginning in 2020, the annual notice is only required for matching contribution safe harbor plans (not nonelective contribution plans). However, the notice is still required for EACAs and for safe harbor plans that also provide non-safe harbor matching contributions not required to satisfy the ACP test, the IRS clarified in Notice 2020-86.

A 401(k) safe harbor plan must generally be adopted before the beginning of the plan year and be maintained throughout a full 12-month plan year. The IRS's 401(k) regulations also make it easy for employers to implement safe harbor plans by allowing plan sponsors to wait until 30 days before the end of the plan year to adopt a 3 percent automatic contribution feature. The plan must specify that it will use NHCEs' current year ADPs in the event that the sponsor decides not to utilize the safe harbor. A contingent notice must be given 30 to 90 days before the beginning of the plan year indicating that safe harbor nonelective contributions may be made. A follow-up notice must be provided at least 30 days before the end of the plan year stating that safe harbor contributions will be made. Plans are not required to continue using that feature in the following year and are not limited on the number of times that they may switch back and forth.

Although safe harbor 401(k) plans provide generous benefits, they are also attractive because they greatly simplify plan administration and eliminate the possible need for HCEs to take back a portion of their elective deferrals to satisfy nondiscrimination requirements.

Note: One of the drawbacks to adopting a safe harbor plan has been the rapid vesting of the mandatory employer contributions. With the gap between safe harbor vesting and non-safe harbor vesting narrowed by the minimum vesting requirements for matching contributions to 401(k) plans, the cost increase of adopting a safe harbor plan is diminished, especially for employers that already provide a “3 percent of” compensation match. In addition, while lower-paid employees are not likely to take advantage of the increased contribution limits because they generally make contributions that are well below the current limits, higher-paid employees are going to want to take advantage of the increased limits. This will make it more difficult for plans to pass the ADP and ACP tests. Utilizing a safe harbor may not be too much of an expense, especially when it keeps key employees happy, because they can maximize their 401(k) contributions and reduce the time and expense of performing the antidiscrimination tests and correcting any excess contributions.

Suspending nonelective contributions to safe harbor plans due to business hardship. The IRS’s final regulations allow employers to reduce or suspend safe harbor contributions (nonelective or matching) in the event of financial hardship. Safe harbor matching contributions may be reduced or suspended under a midyear amendment only if the employer is operating at an economic loss, or if the notice provided to participants before the beginning of the plan year discloses that the contributions might be reduced or suspended midyear, that participants will receive a supplemental notice if that occurs, and that the reduction or suspension will not apply until at least 30 days after the supplemental notice is provided. Additionally:

The supplemental notice requirement is satisfied if each eligible employee is given a notice that explains:

The Sarbanes-Oxley Act requires prior notices of 401(k) blackout periods and bars directors and executives from trading employer stock during blackout periods.

Blackout period definition. A "blackout period" is any period of more than 3 consecutive business days during which the ability of participants or beneficiaries under an individual account plan to direct or diversify assets credited to their accounts, to obtain loans from the plan, or to obtain distributions from the plan is temporarily suspended, limited, or restricted. A blackout period does not include a suspension, limitation, or restriction that:

Blackout notice requirements. At least 30 days before a blackout period, the plan administrator is required to provide a notice to affected plan participants and beneficiaries written in simple language. A similar notice must be provided at the same time to issuers of employer securities. The DOL regulations include a model notice that may be used.

Blackout notice contents. The notice must contain the following information:

Blackout notice timing. The notice must be furnished to all affected participants and beneficiaries at least 30 days, but not more than 60 days, in advance of the last date on which such participants and beneficiaries could exercise the affected rights before the blackout period. The 30 days' advance requirement does not apply if:

In these cases, the notice must be provided as soon as reasonably possible.

If the notice is not furnished within the prescribed time limits (unless the blackout period applies solely in connection with certain participants or beneficiaries becoming, or ceasing to be, participants or beneficiaries of the plan as a result of a business reorganization), it must include a statement that federal law generally requires that the notice be furnished to affected participants and beneficiaries at least 30 days in advance of the last date on which they could exercise the affected rights immediately before the commencement of a blackout period and an explanation of the reasons why at least 30 days' advance notice could not be furnished.

The notice may be provided electronically if recipients would have reasonable access to an electronic notice.

If the blackout period dates are changed, a revised notice must be provided as soon as reasonably practicable explaining what has changed and the reasons for those changes.

Blackout notice violations. If a plan administrator refuses or fails to provide the blackout notice in a timely manner, the DOL may assess a civil penalty of up to $100 per day for each participant or beneficiary who did not receive the notice.

Notice to issuer of employer securities. A similar notice must be provided within the same time frames to the issuer of employer securities held by the plan and subject to the blackout period.

Insider trading restrictions. The Sarbanes-Oxley Act prohibits directors or executive officers (insiders) from engaging in transactions involving employer securities outside of the plan during a blackout period. The insider trading prohibition applies to any employer securities acquired in connection with the insider's services or employment.

The IRC allows 401(k) plans to be amended to add a "Roth" feature, which is similar to the Roth IRA. Under a 401(k) plan with the Roth feature added, an employee may make an after-tax contribution that will earn income tax-free. A qualified distribution of both the contribution and the income attributed to it will be tax-free when distributed. This is in contrast to regular 401(k) contributions, which are made before taxes, earn income tax-free but are taxed when distributed, including both the original contribution and the earnings attributed to it. The participant decides whether to designate elective contributions as Roth 401(k) contributions. A designation of an elective contribution as a Roth 401(k) contribution is irrevocable. Roth contributions must be maintained in a separate account from the time they are made until the account is completely distributed.

An employer may not have a Roth 401(k) plan only. There must always be the option of making regular 401(k) contributions.

Roth 401(k) contributions are still 401(k) contributions. This means that they:

Who may benefit from a Roth contribution? Using the Roth feature is not for everyone, but it may be beneficial to employees who will be in the same or a higher tax bracket when they retire. This will often be true of young employees who are just starting out and employees who currently have high income tax deductions (dependents, mortgage interest, property tax, etc.) that will be gone by the time of retirement. The decision to use a Roth or not is further complicated by the impact of the alternative minimum tax and the possible taxation of Social Security benefits and usually has to be made on an individual basis. In addition, an employee may designate all, part, or none of his or her contribution as a Roth contribution.

Qualified distribution requirements. A distribution is a "qualified distribution" that receives tax-free treatment if it was made after the 5-year period beginning with the first tax year for which a contribution was made to the Roth 401(k) account or to an earlier Roth 401(k) account from which a rollover occurred and was also made:

Roth 401(k) vs. Roth IRA. The main differences between Roth 401(k)s and Roth IRAs are:

The IRC provides for other employer-sponsored retirement plans that are similar to but simpler to administer than 401(k) plans. SEPs and SIMPLE plans have specified minimum requirements and offer little design flexibility in return for simple administration.

SEPs provide a means for employers, especially small employers, to provide tax-favored retirement plans for their employees without all the complex requirements of ERISA and the IRC. SEPs have simplified participation, vesting, and contribution limits. Employees aged 21 years or older who meet minimal annual earnings requirements and who have performed services for the employer in at least 3 of the preceding 5 calendar years must be included in the SEP. Contributions must be made for all employees who meet the participation standards during the calendar year, even if they are not employed at the time the contribution is made. SEPs offer deductible contribution limits similar to those for other tax-favored retirement plans. The contributions made to an employee's SEP account are 100 percent vested when made. SEP assets are managed by a financial institution that supplies information to employees. Employers sponsoring a SEP have limited reporting and disclosure duties. SEP contributions may not be made through a CODA.

Employers with 100 or fewer employees that do not sponsor another qualified retirement plan may adopt another kind of simplified retirement plan, the SIMPLE plan. Under a SIMPLE plan, employees can defer up to a certain amount (determined annually by the IRS) into either an IRA or a 401(k) account. For the current maximum contribution amount, visit http://www.irs.gov. Employers generally must match employee contributions on a dollar-for-dollar basis up to 3 percent of an individual's compensation. (This requirement does not apply if the employer makes nonelective contributions instead.) A lower percentage (but not less than 1 percent) may be elected in 2 out of any 5 years. Plans that meet these rules and provide 100 percent vesting automatically pass the complex nondiscrimination rules for retirement plans. SIMPLE plans are also subject to relaxed reporting and disclosure requirements.

A SIMPLE IRA may include an automatic contribution arrangement that provides for default contributions and investment options absent an employee's affirmative election not to contribute (IRS Notice 2009-66). The IRS has provided a sample amendment that may be used to add an automatic contribution arrangement to a SIMPLE IRA plan (http://www.irs.gov).

IRC Secs. 403(b) and 457 provide for retirement plans that are similar to 401(k) plans with most of the same contribution limits and restrictions on distributions. Employees of educational institutions and nonprofit organizations are eligible to contribute to 403(b) plans through their employment. Government employers may sponsor 457 plans for their employees. Depending on the degree of involvement of the employer in administering the plan, 403(b) plans may or may not be covered by ERISA. Because they are government plans, 457 plans are exempt from coverage by ERISA.

A 403(b) plan may be established by a public school, a college or university, or charitable entity tax exempt under IRC Sec. 501(c)(3). 403(b) plans are similar to 401(k) plans. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary. In this case, their deferred money goes to a 403(b) plan sponsored by the employer. This deferred money and the earnings on it are generally not subject to taxation by the federal government or by most state governments until distributed. A 403(b) annuity can be carried with the participant when he or she changes employers or retires.

Under a 403(b) plan, employers may purchase annuity contracts or establish custodial accounts invested only in mutual funds for the purpose of providing retirement income for their eligible employees. Annuity contracts must be purchased from a state licensed insurance company, and the custodial accounts must be held by a custodian bank or IRS-approved non-bank trustee/custodian. The annuity contracts and custodial accounts may be funded by employee salary deferrals, employer contributions, or both. Although not subject to the qualification requirements of IRC Sec. 401, some of the requirements that apply to qualified plans also apply, with modifications, to 403(b) plans.

403(b) regulations. The regulations provide that a 403(b) program be maintained pursuant to a written defined contribution plan that satisfies Sec. 403(b) in both form and operation and contains all the terms and conditions for eligibility, limitations, and benefits under the plan. In addition, the regulations provide that:

ERISA exemption. 403(b) plans sponsored by a church or a government entity are exempt from ERISA. The DOL regulations also exempt 403(b)s that don't qualify for the church or government exemption from ERISA. A 403(b) plan that is funded solely through salary reduction agreements or agreements to forgo an increase in salary is not considered to be “established or maintained” by an employer and, therefore, is not an employee pension benefit plan subject to ERISA if:

The DOL has indicated that the 403(b) requirements provided in IRS regulations, including the written plan requirement, do not result in a 403(b) plan being covered by ERISA (DOL Field Assistance Bulletin No. 2007-02). The DOL specifically stated, for example, that an employer’s development and adoption of a single document to coordinate administration among different issuers and to address tax matters that apply, such as the universal availability requirement, without reference to a particular contract or account, would not result in a 403(b) program being covered by ERISA.

An increase in the otherwise applicable dollar limits on elective deferrals under 401(k) plans, 403(b) annuities, SEPs, SIMPLE plans, or 457 plans is allowed for individuals who have attained the age of 50 by the end of the year. For the current catch-up contribution limits, visit http://www.irs.gov. Catch-up contributions are not subject to any other contribution limit and are not subject to nondiscrimination rules. Plans must be amended to accept catch-up contributions and must provide that all eligible individuals may make catch-up elections. Employers may make contributions matching all or a percentage of catch-up contributions, but the matching contributions are subject to the normal rules.

The retirement saver's credit provides a tax credit to encourage low-income and moderate-income families and individuals to save for retirement. Eligible taxpayers who contribute to an IRA or an employer-sponsored plan, including a 401(k), 403(b), or 457 plan, can receive a nonrefundable tax credit, in addition to the tax deduction for contributing to an IRA or to an employer-sponsored plan. In determining the amount of the credit, neither the amount of any refundable tax credits nor the adoption credit is taken into consideration. The eligible income brackets are indexed to inflation.

Individuals claim the credit on their federal income tax returns. The amount of the credit declines as income increases.

The credit is not available to taxpayers under the age of 18 or to full-time students. If a worker or spouse receives a preretirement distribution from a retirement plan (such as a hardship withdrawal), any credit taken in that same year and in the 2 subsequent years is reduced by the amount of the distribution.

Because it is nonrefundable, some families may not benefit from the retirement savings tax credit because they have no net income tax liability. Also, the credit may not be large enough to provide a savings incentive for families with incomes near the upper limits. On the other hand, families who increase their savings to claim the retirement savings credit and who are eligible for the earned income tax credit (EITC) may increase the amount of the EITC for which they qualify.

Because the credit is based on adjusted gross income, it increases the net benefit of contributing to a retirement plan.

For the current adjusted gross income limitations for determining the retirement savings contribution credit for married taxpayers, heads of household, and singles, visit http://www.irs.gov.

ERISA requires plan fiduciaries, when selecting and monitoring plan investment and service providers, to act prudently and solely in the interest of the plan’s participants and beneficiaries. Regarding investments, the fiduciary must give appropriate consideration to the relevant facts and circumstances and act accordingly (29 CFR Sec. 2550.404a-1).

Decisions must be based on factors that the fiduciary reasonably determines are relevant to a risk-and-return analysis, which may include the economic effects of climate change and other environmental, social, or governance factors, according to final regulations issued December 1, 2022 (87 Fed. Reg. 73822). A fiduciary may not subordinate the interests of participants and beneficiaries to other objectives, but may consider collateral benefits other than investment returns if choosing between investments that serve the plan’s financial interests equally.

Responsible plan fiduciaries must ensure that arrangements with their service providers are "reasonable" and that only "reasonable" compensation is paid for services.

In 2012, the DOL Employee Benefits Security Administration (EBSA) issued disclosure requirements for covered service providers (CSPs) to ERISA-covered defined benefit and defined contribution pension plans. The rule does not apply to SEPs, SIMPLE retirement accounts, IRAs, certain 403(b) annuity contracts and custodial accounts, or employee welfare benefit plans. The rule establishes specific disclosure obligations for plan service providers to ensure that responsible plan fiduciaries (RPFs) are provided the information they need to make better decisions when selecting and monitoring service providers for their plans.

The final rule requires CSPs to provide RPFs with the information they need to:

Service providers not in compliance with the final rule will be subject to the prohibited transaction rules of ERISA Sec. 406 and IRC Sec. 4975 penalties.

CSPs. CSPs are those who expect at least $1,000 in compensation to be received for services to a covered plan and include:

The final regulation includes a class exemption from the prohibited transaction provisions of ERISA for responsible plan fiduciaries that enter into service contracts without knowing that the CSP has failed to comply with its disclosure obligations. The class exemption requires that fiduciaries notify the DOL of the disclosure failure. Fiduciaries can file the notice online at http://www.dol.gov.

Disclosure of services and compensation. Information required to be disclosed by a CSP must be furnished in writing to an RPF for the covered plan. The regulation does not require a formal written contract delineating the disclosure obligations. CSPs must describe the services to be provided and all direct and indirect compensation to be received by a CSP, its affiliates, or subcontractors.

“Direct compensation” is compensation received directly from the covered plan. “Indirect compensation” generally is compensation received from any source other than the plan sponsor, the CSP, an affiliate, or subcontractor.

In order to enable an RPF to assess potential conflicts of interest, CSPs who disclose “indirect compensation” also must describe the arrangement between the payer and the CSP pursuant to which indirect compensation is paid. CSPs must identify the sources for indirect compensation, plus the services to which such compensation relates.

Compensation disclosures by CSPs are to include allocations of compensation made among related parties (i.e., among a CSP’s affiliates or subcontractors) when such allocations occur as a result of charges made against a plan’s investment or are set on a transaction basis.

CSPs must disclose whether they are providing recordkeeping services and the compensation attributable to such services, even when no explicit charge for recordkeeping is identified as part of the service “package” or contract.

Some CSPs must disclose an investment’s annual operating expenses (e.g., expense ratio) and any ongoing operating expenses in addition to annual operating expenses. For participant-directed individual account plans, such disclosures must include “total annual operating expenses” as required by the regulations on fee and expense disclosure to plan participants.

The final regulation provides a “pass-through” for investment-related disclosures furnished by recordkeepers or brokers. A CSP may provide current disclosure materials of an unaffiliated issuer of a designated investment alternative or information replicated from such materials, provided that the issuer is a registered investment company (i.e., mutual fund), an insurance company qualified to do business in a state, an issuer of a publicly traded security, or a financial institution supervised by a state or federal agency.

Service providers may use electronic means to disclose information to plan fiduciaries provided that the CSP’s disclosures on a website or other electronic medium are readily accessible to the RPF, and the fiduciary has clear notification on how to access the information.

Providing a guide to initial disclosures. EBSA strongly encourages CSPs to offer RPFs a “guide,” summary, or similar tool to assist fiduciaries in identifying all of the required disclosures, particularly when service arrangements and related compensation are complex, and information is disclosed in multiple documents. EBSA has included a Sample Guide as an appendix to the final regulation that can be used on a voluntary basis by CSPs as a model for such a guide. EBSA intends to require CSPs to furnish a guide or similar tool to assist RPFs’ review of initial disclosures.

Ongoing disclosure obligations. Generally, CSPs must disclose changes to initial information as soon as practicable, but no later than 60 days from when the CSP is informed of such change. Disclosures of changes to investment-related information are to be made at least annually. Service providers must disclose compensation or other information related to their service arrangements upon the request of the RPF or plan administrator, reasonably in advance of the date when such person states that he or she must comply with ERISA’s reporting and disclosure requirements.

Disclosure errors. The final regulation allows for timely corrections of an error or omission in required disclosures when a CSP is acting in good faith and with reasonable diligence. Such corrections must be made not later than 30 days from the date that the CSP knows of the error or omission.

Administrators of participant-directed individual account plans are subject to special fee and expense disclosure requirements (29 CFR Sec. 2550.404a-5). According to the DOL, the regulation was designed to ensure:

Information disclosure requirement. The regulation provides that the investment of plan assets is a fiduciary act governed by ERISA's fiduciary standards, which require plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. Thus, when a plan allocates investment responsibilities to participants or beneficiaries, the plan administrator must take steps to ensure that the participants and beneficiaries, on a regular and periodic basis, are made aware of their rights and responsibilities with respect to the investment of assets held in, or contributed to, their accounts and are provided sufficient information about the plan and the plan’s investment options, including fee and expense information, to make informed decisions when managing their individual accounts. Thus, a plan administrator must provide to each participant or beneficiary certain plan-related information and certain investment-related information.

Liability protection. The regulation provides plan administrators protection from liability for the completeness and accuracy of information provided to participants if the plan administrator reasonably and in good faith relies on information provided by a service provider.

Plan-related information disclosure requirement. The first category of information that must be disclosed is plan-related information. This general category is further divided into the following three subcategories:

The information in these three subcategories must be given to participants on or before the date they can first direct their investments and then again annually thereafter.

Statements of actual charges or deductions. In addition to the plan-related information that must be furnished up front and annually, participants must receive statements, at least quarterly, showing the dollar amount of the plan-related fees and expenses (whether “administrative” or “individual”) actually charged to or deducted from their individual accounts, along with a description of the services for which the charge or deduction was made. These specific disclosures may be included in required quarterly benefit statements.

Investment-related disclosure requirement. The second category of information that must be disclosed is investment-related information. This category contains several subcategories of core information about each investment option under the plan, including:

After a participant has invested in a particular investment option, he or she must be provided any materials the plan receives regarding voting, tender, or similar rights in the option. Upon request, the plan administrator must also furnish prospectuses, financial reports, and statements of valuation and of assets held by an investment option.

Comparative format requirement. Investment-related information must be furnished to participants or beneficiaries on or before the date they can first direct their investments and annually thereafter. As noted above, it also must be furnished in a chart or similar format designed to facilitate a comparison of each investment option available under the plan. The regulation includes, as an appendix, a model comparative chart that, when correctly completed, may be used by the plan administrator to satisfy the rule’s requirement that a plan’s investment option information be provided in a comparative format. The model comparative chart may be obtained at http://www.dol.gov.

Electronic distribution. The DOL's general disclosure regulation (29 CFR Sec. 2520.104b-1) applies to material furnished on fees and expenses, including the safe harbor for electronic disclosures, including the safe harbor for electronic disclosures, as broadened in 2020 for retirement plans (see “Electronic Disclosures,” above).

Notice content. The notices must all contain the following information:

Individual account plans such as 401(k) plans that provide for participant-directed investments can reduce or eliminate their fiduciary liability for the consequences of the participant's investment decisions if the plan meets the requirements of ERISA Sec. 404(c). In general, an individual account plan qualifies as a 404(c) plan if it:

A participant is considered to have the opportunity to exercise control if there is a named fiduciary to receive investment instructions who is obligated to comply with those instructions and the participant has access to sufficient information to make informed decisions when choosing between the investment alternatives. There are detailed requirements about the information that must be provided and the number and types of investment alternatives that must be offered (29 CFR Sec. 2550.404c-1). The disclosure requirements in this regulation have been amended to integrate with the fee and expense disclosure requirements to avoid having different disclosure rules for plans intended to comply with the ERISA Sec. 404(c) requirements establishing a uniform disclosure framework for all participant-directed individual account plans.

Warning: Although Sec. 404(c) may relieve plan fiduciaries of liability for participants' investment decisions, it does not eliminate liability for decisions that the fiduciary makes. These include the selection of the investment alternatives offered by the plan. Plan fiduciaries must therefore monitor the continued performance and the mix of the investment alternatives provided.

Application of 404(c) protections to default investments. The PPA extended the protections of Sec. 404(c) to plans that use default investments in the event that the participant does not make his or her own election. The protection applies if:

Application of 404(c) protections during blackout periods. For participant-directed accounts, a fiduciary is generally not liable for losses incurred during a blackout period if ERISA's fiduciary obligations are satisfied and other duties or authorizing and implementing a blackout are performed. Blackout periods frequently involve a change in the investment options offered under a plan. If a participant does not make an affirmative election among the new investment options offered after the blackout, 404(c) protection applies to the plan's default investment if:

To make it easier for plan fiduciaries to provide investment advice to plan participants, the PPA added a prohibited transaction exemption for "eligible investment advice arrangements" so that mutual fund companies, insurance companies, and other parties-in-interest can be compensated for providing investment advice to participants who select their own investments in a 401(k) and other individual account plans.

If the requirements of the provision are met, the following are not treated as prohibited transactions: (1) the provision of investment advice; (2) an investment transaction (i.e., a sale, acquisition, or holding of a security or other property) pursuant to the advice; and (3) the direct or indirect receipt of fees or other compensation in connection with the provision of the advice or an investment transaction pursuant to the advice.

Eligible investment advice arrangements. An "eligible investment advice arrangement" is an arrangement that (1) provides that any fees (including any commission or compensation) received by the fiduciary adviser for investment advice do not vary depending on the what investment option is selected, or (2) uses a computer model that meets certain requirements to provide the advice. The arrangement must be expressly authorized by a plan fiduciary other than (1) the person offering the investment advice program, (2) any person providing investment options under the plan, or (3) any affiliate of (1) or (2).

Note: Most of these requirements extend to a fiduciary adviser’s affiliates. However, the requirement that fees not vary based on the investment options selected does not apply to affiliates unless they also provide investment advice to the plan (29 CFR §2550-408g-1).

Use of a computer model. If an eligible investment advice arrangement provides investment advice pursuant to a computer model, the model must:

Certification. Before a model is used, an eligible investment expert must certify that the model meets these requirements. The certification must be renewed if there are material changes to the model. For this purpose, an "eligible investment expert" is a person who has the appropriate training or experience and is not affiliated with any investment adviser or related person. If a computer model is used, the only investment advice that may be provided is the advice generated by the computer model, and any investment transaction pursuant to the advice must occur solely at the direction of the participant or beneficiary. This requirement does not preclude a participant or beneficiary from requesting other investment advice.

Audit requirement. An annual audit of an eligible investment advice arrangement for compliance with the above requirements must be conducted by an independent auditor with appropriate technical training or experience and proficiency. The auditor must be unrelated to the person offering the investment advice arrangement or any of the investment options, and have played no role in developing the arrangement or certifying the computer model. The auditor must issue a report of the audit results to the fiduciary that authorized use of the arrangement.

Notice requirement. Before the initial provision of investment advice, the fiduciary adviser must provide written notice (which may be in electronic form) to the recipient of the advice. Among other elements, the disclosure must include information relating to the adviser's qualifications, possible conflicts, the nature of the advice that will be given, and how information about the recipient will be used. This information must also be provided on request and when there is a material change.

Selection and review of a fiduciary adviser. Employers and plan fiduciaries have a fiduciary responsibility under ERISA for the prudent selection and periodic review of a fiduciary adviser with whom an employer or plan fiduciary has made an arrangement for the provision of investment advice to plan participants and beneficiaries. An employer or plan fiduciary does not have the duty to monitor the specific investment advice given by a fiduciary adviser. The DOL has stated that a plan sponsor or other fiduciary that prudently selects and monitors an investment advice provider will not be liable for the advice furnished by such provider to the plan’s participants and beneficiaries, whether or not that advice is provided pursuant to this statutory exemption (DOL Field Assistance Bulletin No. 2007-01).

Selection guidelines. The DOL has also stated that a fiduciary should engage in an objective process designed to elicit information necessary to assess the service provider’s qualifications, quality of services offered, and reasonableness of fees charged for the service. The process also must avoid self-dealing, conflicts of interest, or other improper influence. The DOL expects that the process utilized by a responsible fiduciary will take into account:

Monitoring guidelines. When monitoring investment advisors, the DOL anticipates that fiduciaries will periodically review, among other things, the extent to which there have been any changes in the information that served as the basis for the initial selection of the investment advisor, including whether the advisor continues to meet applicable federal and state securities law requirements and whether the advice being furnished to participants and beneficiaries was based on generally accepted investment theories. Fiduciaries should also take into account whether the investment advice provider is complying with the contract under which it was hired; utilization of the investment advice services by the participants in relation to the cost of the services to the plan; and participants' comments and complaints about the quality of the furnished advice. The DOL has noted that if a complaint or complaints raise questions concerning the quality of advice being provided, a fiduciary may have to review the specific advice at issue with the investment advisor.

According to the DOL, plan assets can be used to pay reasonable expenses in providing investment advice to participants and beneficiaries.

The PPA added provisions to ERISA and the IRC to allow participants to divest investments in employer stock. The requirements apply to individual account plans that hold publicly traded employer stock. The diversification requirements do not apply to an employee stock ownership plan (ESOP) if there are no elective, employee, or matching contributions to the plan and the plan is separate from any other defined benefit plan or individual account plan maintained by the same employer or employers.

Employee contributions and elective deferrals. A participant must be allowed to direct the plan to immediately divest any employer securities attributable to employee contributions and elective deferrals and to reinvest an equivalent amount in other specified investment options.

Employer contributions. In the case of the portion of the account attributable to employer contributions other than elective deferrals, which is invested in employer securities, a participant who has completed at least 3 years of service must be allowed to direct the plan to divest any such securities and to reinvest an equivalent amount in other specified investment options.

Alternate investment options and restrictions. A plan must offer at least three investment options, other than employer securities, to which an applicable individual may direct the proceeds from the divestment of employer securities, each of which is diversified and has materially different risk and return characteristics. A plan may limit the time for divestment and reinvestment to periodic, reasonable opportunities occurring at least quarterly. A plan may not impose restrictions or conditions on the investment of employer securities that are not imposed on the investment of other assets of the plan.

Notice of right to divest. Not later than 30 days before the first date on which a participant was eligible to divest employer securities, the plan administrator had to provide that participant with a notice that explained the right to divest and described the importance of diversifying the investment of retirement account assets. The IRS issued a model notice, which was included in IRS Notice 2006-107 and can be found at http://www.irs.gov.

A major issue for employers sponsoring 401(k) plans is getting employees, especially lower-paid employees, to participate. Plans generally require employees to make an affirmative election to have a percentage of their pay deferred and contributed to the plan. This is a difficult hurdle for many employees. The IRS has ruled that a 401(k) plan may provide for automatic contributions of a specified percentage of an employee's compensation to a 401(k) plan unless the employee elects not to do so (Rev. Rul. 2000-8). Notice must be given to each employee that the deferral will take effect unless they elect to receive cash or have a different percentage deferred. The notice must be given at the time of hire, when the provision takes effect for current employees, and annually thereafter before the beginning of each year so that employees have an “effective opportunity” to elect to receive cash instead.

To encourage employers to implement automatic enrollment, the PPA provided regulatory relief in various forms to plans that meet the definition of an eligible automatic contribution arrangement (EACA) or a qualified automatic contribution arrangement (QACA). The SECURE 2.0 Act went further, establishing mandatory automatic enrollment in new 401(k) plans for plan years beginning in 2025 and after (see “SECURE 2.0 Mandates Auto-enrollment,” below).

After the PPA’s enactment, the IRS provided two sample plan amendments for sponsors, practitioners, and employers that want to add certain automatic contribution features to their 401(k) plans. Sample Amendment 1 can be used to add an automatic contribution arrangement to a 401(k) plan. Sample Amendment 2 can be used to add an EACA (permitting 90-day withdrawals) to a 401(k) plan (IRS Notice 2009-65). Two sample plan amendments are provided in the Appendix of Notice 2009-65 (http://www.irs.gov/pub/irs). Plan sponsors are not required to adopt either amendment verbatim.

A 401(k) plan that contains an automatic enrollment feature that satisfies the requirements for a QACA is treated as meeting the ADP test with respect to elective deferrals and the ACP test with respect to matching contributions. In addition, a plan consisting solely of contributions made pursuant to a QACA is not subject to the top-heavy rules. To qualify for this safe harbor, a QACA must meet certain requirements for the (1) automatic deferral and the amount of the elective contributions, (2) matching or nonelective contributions, and (3) notice to employees.

Automatic deferral/amount of elective contributions requirement. A QACA must provide that, unless an employee elects otherwise, the employee is treated as making an election to make elective deferrals equal to a stated percentage of compensation of no more than 15 percent and at least equal to:

The stated percentage must be applied uniformly to all eligible employees. Eligible employees are all employees eligible to participate in the arrangement, other than employees eligible to participate immediately before the date on which the arrangement became a QACA with an election in effect (either to participate at a certain percentage or not to participate).

The SECURE Act raised the maximum deferral percentage from 10 to 15 percent. A plan sponsor may choose to continue the 10 percent cap but, if it has incorporated the statutory maximum by reference, must amend the plan accordingly, according to IRS Notice 2020-86. The deadline for doing so was extended until December 31, 2025, by Notice 2022-33.

Providing for automatic contribution increases. The IRS has provided examples of how automatic increases to the default contribution amount may be structured. An automatic contribution arrangement under which an eligible employee’s default contribution percentage automatically increases in plan years after the first plan year of an eligible employee’s participation in the automatic contribution arrangement may be based in part on increases in the eligible employee’s plan compensation. Default contributions will satisfy the uniformity and minimum percentage requirements even if contributions for all eligible employees increase on a date other than the first day of a plan year such as the date that annual raises go into effect (Rev. Rul. 2009-30).

Matching or nonelective contribution requirement. A QACA satisfies the contribution requirement if the employer either (1) satisfies a matching contribution requirement or (2) makes a nonelective contribution to a defined contribution plan of at least 3 percent of an employee's compensation on behalf of each NHCE who is eligible to participate in the automatic enrollment feature.

An employer satisfies the matching contribution requirement if:

Additional requirement for matching contribution relief. A plan with a QACA that provides for matching contributions and satisfies the safe harbor contribution requirements applicable to the QACA is deemed to satisfy the ACP test if:

Vesting. Any matching or other employer contributions taken into account in determining whether the requirements for a QACA are satisfied must vest in 2 years so that employees with 2 years of service are 100 percent vested.

Withdrawal restrictions. Any matching or other employer contributions taken into account in determining whether the requirements for a QACA are satisfied must satisfy the withdrawal rules for elective contributions.

Notice requirement. Each employee eligible to participate in a QACA must receive notice of the arrangement, which is sufficiently accurate and comprehensive, to apprise the employee of his or her rights and obligations and is written in a manner calculated to be understood by the average employee to whom the arrangement applies. The notice must explain:

The employee must be given a reasonable period of time after receiving the notice and before the first election contribution must be made to make an election with respect to contributions and investments.

The SECURE Act eliminated the notice requirement for QACAs that provide nonelective employer contributions.

Correcting initial automatic enrollment contributions. In the case of contributions made pursuant to an EACA, employees are allowed to opt out of or reduce their automatic enrollment contribution during the first 90 days after their first contribution. Erroneous automatic contributions may be distributed from the plan no later than 90 days after the date of an employee's first elective contribution under the arrangement. The amount that is treated as an erroneous contribution is limited to the amount of automatic contributions made during the 90-day period that the employee elects to so treat. These distributions are generally treated as a payment of compensation rather than as a contribution to and then a distribution from the plan, and the 10 percent early withdrawal tax does not apply to distributions of erroneous automatic contributions. In addition, these contributions are not taken into account for purposes of applying the nondiscrimination rules or the limit on elective deferrals and are not subject to otherwise applicable withdrawal restrictions.

Note: The corrective distributions rules apply to distributions from (1) qualified plans under IRC Sec. 401(a), (2) IRC Sec. 403(b) annuity contracts, and (3) governmental deferred compensation plans under IRC Sec. 457(b). In addition, the corrective distribution rules are not limited to arrangements meeting the QACA requirements.

Excess contributions. In the case of an EACA, the excise tax on excess contributions does not apply to any excess contributions or excess aggregate contributions that, together with income allocatable to the contributions, are distributed or forfeited (if forfeitable) within 6 months after the close of the plan year. This doubles the length of time otherwise allowed to make such distributions. Additionally, any excess contributions or excess aggregate contributions (and any income allocatable thereto) distributed within this 6-month period are treated as earned and received by the recipient in the taxable year in which the distribution is made (regardless of the amount distributed), and the income allocatable to excess contributions or excess aggregate contributions that must be distributed is determined through the end of the year for which the contributions were made.

EACA requirements. To qualify as an EACA, an automatic enrollment program must provide that if the participant does not make an investment election, the automatic contributions will be invested in accordance with regulations issued by the DOL under ERISA Sec. 404(c)(5) regarding default investments.

Notice requirement. The plan administrator of a plan with an EACA must, within a reasonable period before a plan year, provide to each participant to whom the arrangement applies for that plan year with notice of the participant's rights and obligations under the arrangement. This notice must include an explanation of the following:

This is the same information that must be in the notice for a plan that has an automatic enrollment arrangement to qualify for preemption of state withholding laws.

Any state law (such as a requirement of prior authorization to withhold from wages) that would directly or indirectly prohibit or restrict the inclusion in a plan of an automatic contribution arrangement is preempted. The DOL may establish minimum standards for such arrangements in order for preemption to apply. An "automatic contribution arrangement" is defined as an arrangement under which:

Note: The preemption rules are not limited to arrangements that meet the requirements of a qualified automatic enrollment feature. A plan administrator must provide notice to each participant to whom the automatic contribution arrangement applies. Notice failures are subject to penalties of up to $1,000 per day (adjusted for inflation since 2009).

The DOL regulations provide guidelines for employers in selecting default investments that best serve the retirement needs of workers who do not direct their own investments. The regulations set out conditions to obtain safe harbor relief from fiduciary liability for the investment outcomes of default investments (29 CFR Sec. 2550.404c–5). The requirements for the safe harbor are:

Warning: Qualifying for the safe harbor does not absolve fiduciaries of the duty to prudently select and monitor QDIAs.

Selecting QDIAs. The DOL regulation does not identify specific investment products that are QDIAs. Instead it describes mechanisms for investing participant contributions. The intent is to ensure that an investment qualifying as a QDIA is appropriate as a single investment capable of meeting an employee’s long-term retirement savings needs. The final regulation identifies two individually based mechanisms and one group-based mechanism and also provides for a short-term investment for administrative convenience. The four types of QDIAs are:

A QDIA must either be managed by an investment manager, plan trustee, or plan sponsor (including an investment committee made up of employees) who is a named fiduciary or by an investment company registered under the Investment Company Act of 1940. A QDIA generally may not invest participant contributions in employer securities. A QDIA may be offered through variable annuity contracts or other pooled investment funds.

Stable value funds. The safe harbor does not include stable value funds.

Initial QDIA notice. The initial QDIA notice must be provided:

Annual QDIA notice. The annual QDIA notice must be provided within a reasonable period of time of at least 30 days before the beginning of the plan year. The DOL has indicated that the notice may be provided as early as 90 days before the beginning of the plan year. In addition, the QDIA notice may be combined with the automatic enrollment notice required by the IRS for plans that utilize the automatic enrollment safe harbor (DOL Field Assistance Bulletin No. 2008-03). The IRS and the DOL have collaborated to provide a "Sample Automatic Enrollment and Default Investment Notice" for satisfying both notice requirements. The sample notice may be accessed at http://www.irs.gov.

QDIA notice content. The QDIA notice must be written in a manner calculated to be understood by the average participant and must contain the following:

SECURE 2.0 establishes mandatory automatic enrollment in 401(k) plans that are established in 2025 or later. The general thrust of these provisions is to create a version of retirement savings autopilot by automatically enrolling employees, setting a contribution amount, and steering those contributions to default investment choices if an employee fails to make choices.

New plans, subject to certain exemptions, will be required to enroll employees in an EACA at a rate of 3 to 10 percent of compensation. This rate must then increase annually unless a participant opts out or requests a different rate. These contributions must be invested in a QDIA, again unless a participant elects otherwise.

In retirement or pension plan administration, mistakes happen. Complex rules, constantly changing requirements, overwhelming paperwork and, quite simply, the “human element” virtually ensure that plan administrators will err.

Sometimes, correction means appealing to the appropriate government agency (for example, the IRS, the DOL, or the Pension Benefit Guaranty Corporation) for relief and approval. Often, however, plan sponsors will not want to take relatively minor operational failures to the oversight agencies, particularly if the plan can correct the problem and put everything back to where it was before the problem occurred.

Although every administrative pension plan problem is unique, there are certain common methods that can be applied in solving, mitigating, or avoiding sanctions, penalties, and damages:

It is also important to document each problem and solution, because a history of the plan’s administrative decisions can be useful going forward.

If being audited, plan sponsors first will receive a document request letter from whichever federal agency (for example, the IRS or the DOL) is going to audit their plan. On receiving the data request, most plan sponsors seek an extension of time to gather the necessary information. To make the process more efficient and speed resolution of plan audits, the IRS in November 2016 issued a memorandum that outlines specific time frames for the IRS examiner when preparing, issuing, and following up on an Information Document Request (IDR).

The IDR is generally a long list of documents. These can be hard to locate, especially if there has been turnover in the plan sponsor’s corporate area responsible for the plan. A recent service provider change also can complicate the data-gathering process. The new procedure requires the examiner to wait 14 calendar days after mailing an initial contact letter before taking further action.

The initial contact letter informs the plan sponsor that its plan has been selected for audit. Next, the IRS examiner will call the plan sponsor to discuss the issue being examined and the items requested in the IDR. The examiner will be looking to establish a response date or actual on-site appointment date and can assign a reasonable response date if the parties involved cannot agree on one. If the plan sponsor’s response is not complete, the examiner may grant up to two 15-day extensions.

If it is still not complete, the examiner at that point can start the delinquency notice process. If information is not received within the agreed-on time (up to 10 business days), a summons can be issued, which is a much swifter and more serious expediting process than existed previously.

Given this new procedure, it will be wise for plan sponsors to conduct periodic self-audits. At a minimum, this will help ensure that the plan sponsor can respond in a timely fashion to the IDR.

The DOL selects plans for audit based on:

To prepare for a possible DOL audit, if you receive a detailed comment letter from your independent auditor, read it carefully and respond to each item. Generally, it boils down to knowing your plan document, understanding what your plan’s service provider offers versus the plan administration activities occurring in-house, and the quality of the data you have on plan participants.

Often, the terms of a qualified plan are less important than how the plan is actually being administered. The IRS has various programs in place intended to monitor qualification compliance and help plan sponsors and administrators keep their plans qualified. The IRS developed the Employee Plans Compliance Resolution System (EPCRS), which includes three programs related to qualification errors of administration:

These EPCRS programs involve full corrective action and, potentially, penalties but provide a way to avoid plan disqualification. The IRS’s detailed guidance outlining the EPCRS was consolidated and updated in Revenue Procedure 2021-30 (see the IRS website for details).

Certain types of issues cannot be resolved through any of the EPCRS programs. For example, excise taxes and any additional penalty taxes (such as the early distribution tax) are generally not waived due to correction under the EPCRS. Nor is the EPCRS available for errors that do not implicate the plan’s qualified status, such as prohibited transactions or failing to file a required Form 5500.

Currently more than 20 states, as well as a few cities, require employers to participate in a state-sponsored retirement savings program if they do not sponsor a retirement plan of their own. This typically means auto-enrolling employees in Roth IRAs that are funded by post-tax employee contributions.

In California, for example, employers with at least one employee must register with and submit information to CalSavers. Employees will be automatically enrolled unless they opt out. Employers then must facilitate payroll deductions, which will be added to the employee’s account and invested according to their selections. See the California-specific information available on this Topics page and calsavers.com for more information.